Restaurant EC3 Limited v Tavor Holdings Limited

Damages for trespass are compensatory. The user principle permits compensation measured by a reasonable price or fee for wrongful use of valuable property rights, but it does not permit overcompensation. Where a tenant under a rack-rent lease is unlawfully deprived of possession, assessment of the economic value of the tenant’s possessory rights must take account of the rent that would have been payable to retain those rights. The tenant cannot recover the passing rent as mesne profits without deduction. A different approach may be appropriate in residential unlawful-eviction cases, particularly where compensation includes distress and inconvenience. An adjournment of a winding-up petition should be granted only where the evidence gives reasonable grounds for concluding that the company will pay the undisputed debt within a reasonable time.

Restaurant EC3 Limited appealed against the second and third orders of ICC Judge Jones in insolvency proceedings brought by its landlord, Tavor Holdings Limited. The judge held that the company’s alleged claim for mesne profits did not substantially reduce the petition debt and subsequently ordered the company’s winding up.

The company argued that unlawful re-entry entitled it to damages measured by a reasonable notional rent, without deducting the rent reserved by the Lease. It also argued that the judge’s assessment of the higher petition debt had materially affected the refusal of an adjournment. The central issues were the proper measure of damages for unlawful eviction from commercial premises and whether the winding-up petition should have been adjourned to allow payment.

1. Measure of mesne profits. The appeal against the second order was dismissed. Damages for trespass are compensatory. The restitutionary analysis suggested in Ministry of Defence v Ashman was wrong in light of One-Step (Support) Ltd v Morris-Garner, which confirms that damages compensate for the loss of a valuable right to control the use of property.
2. Under the user principle, compensation may be assessed by reference to a reasonable price or fee for wrongful use. However, a tenant’s right to exclusive possession under a rack-rent lease is interdependent with its obligation to pay rent. In valuing the possessory rights invaded by the landlord’s alleged trespass, the court must therefore take account of the rent which the tenant would have had to continue paying. Otherwise the tenant would be overcompensated.
3. Inverugie Investments Ltd v Hackett provided some support, although the relevant deductions had been made by concession and were not argued. Smith v Khan did not assist because it concerned residential unlawful eviction and involved compensation for anxiety, inconvenience and mental stress. Nothing in the judgment was intended to govern such residential cases.
4. The company’s alternative challenge to the winding-up order also failed. Even assuming that the undisputed debt should have been treated as approximately £120,000 rather than £290,000, the evidence showed no reasonable grounds for believing that the company could pay that lower sum within a reasonable time. The appellate court therefore re-exercised the discretion and reached the same decision as the judge.

The appeal was dismissed.

• Chancery Appeals (ChD): Appeal against the second and third orders of ICC Judge Jones dismissed. The court upheld the legal analysis of mesne profits and, alternatively, re-exercised the adjournment discretion and upheld the winding-up order.